The Consumer Financial Protection Bureau (CFPB) recently published a document entitled Data Point: Credit Invisibles. The purpose of the publication is “…to further the Bureau’s objective of providing an evidence-based perspective on consumer financial markets.”
The focus of CFPB publication is that segment of the population with zero, very little or stale credit histories – who the CFPB describes as “credit invisibles” or “unscorables” and who have great difficulty accessing credit markets.
The challenges faced by credit invisible and unscorable consumers extends beyond access to credit – to other markets – including rental housing – as landlords have become increasingly reliant upon credit scores as part of their tenant screening process. They do so because there is (presumably) a correlation between low scores and the likelihood of a failure to fulfill the terms of a rental agreement. They do so as a way to remove subjectivity from the tenant screening process and, ironically, to reduce the risk of a discrimination claim.
The problem is that even if there is a correlation between poor credit scores and failure to comply with the terms of a rental agreement, the practice has a disproportionate (disparate) impact on certain protected groups (notably those defined by race and national origin) – which can, in fact, form the basis of a Title VIII (fair housing) claim.
Disparate impact claims are challenging to defend – since once a plaintiff establishes that a practice has a disparate impact on a protected group (of which they are part) – the burden shifts to the landlord who must then establish business necessity. However, part of establishing business necessity is proving that there is no practical alternative to the offending process. Therein lies the problem.
There is an alternative to use of credit scores to screen prospective residents. There is also a way to manage rental risk (to thoroughly vet prospective residents) without teeing ourselves up as defendants in disparate impact discrimination claims.
The answer is to look beyond the score – to identify those whose scores are the result of factors largely outside their control (medical collections come to mind) – and who, even while under enormous financial pressure, have month-in and month-out paid their rent.
The answer is to take the time necessary to contact current and previous landlords – to ask questions that elicit objective responses – ask about the number of late payments, noise complaints, etc.
The answer is to develop and follow criteria that looks at all the information – credit detail, criminal and eviction searches, and of course, rental verifications. Credit criteria should include treatment of things like:
- Rental collections;
- Open bankruptcies;
- Medical debt; and
- Anything that might offset any derogatory findings.
Looking beyond a score to more direct measures of an applicant’s risk profile will help insulate us from disparate impact claims and identify the atypical but otherwise well qualified applicant – and have a favorable impact on occupancy in the process!
Credit Criteria – Best Practices
The goal is (or should be) to approve (or approve conditionally) as many applicants as possible. It makes little sense to deny tenancy due to a lack of credit or derogatory credit alone – unless the derogatory findings are directly applicable to a tenancy – rental collections, balances owed to landlords and open bankruptcies, for example. In most instances, an increased deposit (or co-signer – depending on income) will suffice – assuming of course, the applicant is otherwise well qualified.
Technology is our friend. It is hard to imagine operating without the wonderful tools we have at our disposal today – including “instant” access to consumer data. It has streamlined the tenant screening process, but it has resulted in some unforeseen consequences – notably the disparate impact form of discrimination and rejection of the atypical but otherwise well qualified applicant.
The good news is that there is an answer – an answer that mitigates the risk of a discrimination claim and increases the number of applicants approved or approved conditionally – an answer that has a favorable impact on occupancy along the way.